Declining prices of vegetables and fuel items pulled down the inflation to zero level in November, the lowest in about five and half years, exerting pressure on RBI to cut rates to boost growth.

The Wholesale Price Index (WPI) based inflation was at 1.77 per cent in October and 7.52 per cent in November 2013.

As per data released by the government today, the WPI inflation remained flat mainly on account of falling prices of vegetables, especially onion, edible oil, petrol and diesel.

In view of the moderation in WPI inflation, which has been on declining trajectory for six months, the industry has stepped up its demand for a rate cut.

The Reserve Bank has maintained a status quo in interest rate since January. The RBI factors in retail inflation while formulating its monetary policy.

In its policy earlier this month, RBI Governor Raghuram Rajan had hinted at a rate cut early next year if inflation continued to decline and government took steps to contain fiscal deficit.

Food inflation, which is on decline since May, fell to nearly three year low of 0.63 per cent.

Inflation in fuel and power segment fell 4.91 per cent, the lowest level since 2009.

This is probably the first time when WPI inflation has hit the exact zero level. The last time WPI was lower than this was (-)0.3 per cent in July 2009.

Onion price contracted 56.28 per cent as compared to a contraction of 59.77 per cent in October. In case of vegetables, the contraction was 28.57 per cent.

Industry chamber Assocham in its reaction to WPI numbers made a strong pitch for an interest rate cut to boost demand for industrial goods and push economic growth.

As per the data, prices of protein rich items of egg, meat and fish rose 4.36 per cent during November, while inflation in potato stood at 34.10 per cent. Inflation in manufactured products, like sugar, edible oils, beverages and cement, fell to 2.04 per cent in November as against 2.43 per cent in the previous month.

Retail inflation data for November showed a record fall to 4.38 per cent.

Meanwhile, ICRA Senior Economist Aditi Nayar said: “With monetary policy focused on the medium term trajectory of CPI inflation, lower than expected WPI print is unlikely to hasten rate cuts”.

The decline in both retail and WPI inflation for November coupled with contraction of industrial production to 4.2 per cent in October, will put pressure on RBI to lower interest rates to boost growth.

Finance Minister Arun Jaitley too on many occasions had nudged the RBI to cut rates. The issue also figured during a debate in the Lok Sabha last week.
RBI Governor Raghuram Rajan has emphasised that interest rate cut by itself would not lift the economy.

Industry has been demanding easing of interest rates to boost growth, which has slumped to 4.7 per cent in 2013-14. The economy is estimated to grow in the range of 5.4-5.9 per cent this fiscal.

COMMENTARY

Indranil Pan, Chief Economist, Kotak Mahindra Bank Limited:
The WPI inflation, like the CPI was anticipated to drop lower from the previous month, on the back of eroding price pressures and also the base effect. However, unlike the fall in the CPI, the drop in the WPI was more than anticipated and this has brought back the focus on the RBI with respect to its reaction function.  No doubt that the implication of global developments of falling commodity prices, especially crude, is likely to be more on the WPI than the CPI. Even as the data provides more evidence of fading inflationary pressures in India, the CPI will continue to remain the crucial number being tracked by the RBI. On the negative side, the INR has been on a depreciation bias for some time now, and closed in on 63.00 today. Considering all the above, we do not think that the RBI will be hasty in dropping the Repo rate (we think that it could come post the Union Budget 2015-16). Importantly, the depth of the repo rate cut could be restricted to 50-75 bps.

Debopam Chaudhuri, Chief Economist, ZyFin Research:
Inflation at 0% is not a very common phenomenon. Also, WPI is not much connected to actual inflation felt on the streets. Based on RBI Inflation Expectations Survey and similar other studies on Inflation sentiment, Indian consumers continue to be plagued by high price levels at the retail level. Unless all different measures of inflation converge to indicate an actual cooling in prices, we don’t expect the RBI to call for a rate cut.

Sidharth Birla, President, FICCI:
The continuous downtrend in both WPI and CPI seen over the past four/five months is a positive signal towards stabilization of prices. While the issue of inflation is being handled well, the sharp dip in manufacturing growth reported in the latest monthly release is a matter of concern. This needs to be tackled on war footing. The recent data on capital goods and consumer durables reflect persistent weak demand conditions.  In addition, the global recovery remains scattered and this is reflected in our export growth which was seen waning in the past few months. Amidst the current situation, a cut in the interest rates will at least provide some impetus to domestic demand. The revision in CPI forecast for March 2015 to 6.0% and the fairly balanced medium term outlook for inflation indicated in the last monetary policy announcement gives sufficient room for an accommodative stance.

Zero inflation due to NDA’s ‘good governance’: BJP

Hailing the zero level of inflation for the month of November, the lowest in about five- and-a-half years, BJP today credited the Narendra Modi government’s “good governance and development policies” for the positive development.

BJP said that the NDA government led by their party has been able to control inflation during its first six months in office in keeping with the promise made to the people ahead of Lok Sabha elections about checking price rise.

Party secretary Shrikant Sharma said the Wholesale Price Index-based inflation was 7.52 per cent in November last year and had for long hovered around 10 per cent due to the “anti- people” policies of the previous Congress-led UPA government.

“The rate of inflation, which was uncontrollable during the Congress-led government, has been brought down to zero due to NDA government’s good governance and development policies,” he said in a statement here.

Noting that the Retail Price Index-based inflation, too, has fallen to 4.38 per cent against 11.16 per cent in November last year, he said petrol and diesel prices have also come down significantly after Modi became Prime Minister.

This is probably the first time when WPI inflation has hit the exact zero level. The last time that the WPI was lower than this was in July 2009 when it was at (-)0.3 per cent.

India’s rapidly cooling inflation supports case for RBI rate cut

India’s wholesale price index showed no increase in November for the first time in near 5-1/2 years as oil prices tumbled, building a case for the central bank to start lowering interest rates early next year to help prop up economic growth.

Asia’s third-largest economy is recovering from the slowest phase of growth since the 1980s, having lost momentum in the last quarter which has raised calls from industry for more support.

Prime Minister Narendra Modi swept to power six months ago on a ticket to oversee a revival in an economy suffering a dearth of investment and slack consumer demand. He has pinned his hopes on rate cuts to help translate his election promise into a reality.

The wholesale price index (WPI) was flat in November against a year earlier, its lowest since July 2009, government data showed on Monday. That compared with a 1.41 percent rise forecast by economists in a Reuters poll.
Inflation dropped to zero mainly driven by a sharp decline in fuel prices, which fell an annual 4.91 percent last month – their first year-on-year fall since November 2009.

Monday’s data comes days after India reported consumer price inflation in November had dropped to 4.38 percent, its lowest level since the government started releasing the data in 2012 and well below the Reserve Bank of India’s (RBI) 6 percent target for January 2016.

“This number is definitely surprising,” said A Prasanna, economist, ICICI Securities Primary Dealership in Mumbai. “This will augur well for inflation outlook…and strengthen the case for a rate cut at the time of February monetary policy.”

Indian businesses have been pleading for a cut in interest rates, which are among the highest in Asia, to stimulate consumption in a domestic demand-driven economy.

Consumer goods output has grown in just two of the last 22 months. It fell an annual 18.6 percent in October, leading to the sharpest contraction in industrial output in three years.

Encouragingly, RBI Governor Raghuram Rajan held out prospects for a cut in the policy interest rate – set at 8.0 percent – early next year if inflation trends remained favourable and the government controlled its fiscal deficit.

Bolstering the rate cut prospect is a nearly 40 percent fall in global crude prices since July which has brought inflation down, lowered the import bill and reduced government spending on fuel subsidies.

Economic growth slowed to 5.3 percent in the July-September quarter from a 2-1/2-year high of 5.7 percent in the quarter ago, signalling it would be some time before the economy recaptures the 8 percent growth levels needed to create enough jobs for a rapidly expanding workforce. (Reuters)